If the Government spends more than it takes in from tax revenue, it runs a budget deficit. This deficit must be covered or financed either by borrowing or printing more money. The Kenya Government has in the past used the two ways of financing its deficit in a balanced manner. The effect in interest rates is whether the deficit is financed through printing or borrowing. The

Government would borrow in the S.T market which increase the demand of available funds for lending which subsequently pushes the interest rates up.

If the Government prints more money this will lead to inflation and the interest rate would eventually rise. Therefore the larger the Government deficit, the higher the level of interest rates.